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Here’s What Marlin Business Services Corp.’s (NASDAQ:MRLN) P/E Ratio Is Telling Us

Brandy Kinsey

This article is written for those who want to get better at using price to earnings ratios (P/E ratios). To keep it practical, we’ll show how Marlin Business Services Corp.’s (NASDAQ:MRLN) P/E ratio could help you assess the value on offer. Based on the last twelve months, Marlin Business Services’s P/E ratio is 7.84. That means that at current prices, buyers pay $7.84 for every $1 in trailing yearly profits.

View our latest analysis for Marlin Business Services

How Do I Calculate A Price To Earnings Ratio?

The formula for P/E is:

Price to Earnings Ratio = Price per Share ÷ Earnings per Share (EPS)

Or for Marlin Business Services:

P/E of 7.84 = $21.67 ÷ $2.77 (Based on the year to September 2018.)

Is A High Price-to-Earnings Ratio Good?

A higher P/E ratio implies that investors pay a higher price for the earning power of the business. That isn’t necessarily good or bad, but a high P/E implies relatively high expectations of what a company can achieve in the future.

How Growth Rates Impact P/E Ratios

Probably the most important factor in determining what P/E a company trades on is the earnings growth. That’s because companies that grow earnings per share quickly will rapidly increase the ‘E’ in the equation. That means even if the current P/E is high, it will reduce over time if the share price stays flat. So while a stock may look expensive based on past earnings, it could be cheap based on future earnings.

Notably, Marlin Business Services grew EPS by a whopping 144% in the last year. And earnings per share have improved by 12% annually, over the last five years. With that performance, I would expect it to have an above average P/E ratio.

How Does Marlin Business Services’s P/E Ratio Compare To Its Peers?

The P/E ratio indicates whether the market has higher or lower expectations of a company. If you look at the image below, you can see Marlin Business Services has a lower P/E than the average (23.4) in the diversified financial industry classification.

NasdaqGS:MRLN PE PEG Gauge January 2nd 19
NasdaqGS:MRLN PE PEG Gauge January 2nd 19

Marlin Business Services’s P/E tells us that market participants think it will not fare as well as its peers in the same industry. While current expectations are low, the stock could be undervalued if the situation is better than the market assumes. You should delve deeper. I like to check if company insiders have been buying or selling.

A Limitation: P/E Ratios Ignore Debt and Cash In The Bank

Don’t forget that the P/E ratio considers market capitalization. Thus, the metric does not reflect cash or debt held by the company. In theory, a company can lower its future P/E ratio by using cash or debt to invest in growth.

Spending on growth might be good or bad a few years later, but the point is that the P/E ratio does not account for the option (or lack thereof).

Marlin Business Services’s Balance Sheet

Marlin Business Services has net debt worth 29% of its market capitalization. This is enough debt that you’d have to make some adjustments before using the P/E ratio to compare it to a company with net cash.

The Verdict On Marlin Business Services’s P/E Ratio

Marlin Business Services’s P/E is 7.8 which is below average (16) in the US market. The company does have a little debt, and EPS growth was good last year. The low P/E ratio suggests current market expectations are muted, implying these levels of growth will not continue.

Investors have an opportunity when market expectations about a stock are wrong. If the reality for a company is not as bad as the P/E ratio indicates, then the share price should increase as the market realizes this. So this free report on the analyst consensus forecasts could help you make a master move on this stock.

You might be able to find a better buy than Marlin Business Services. If you want a selection of possible winners, check out this free list of interesting companies that trade on a P/E below 20 (but have proven they can grow earnings).

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.